چکیده انگلیسی

This article contributes to the related literature by empirically investigating the efficiency of nine energy and precious metal markets over the last decades, employing several pronounced models. We test for both short- and the long-run efficiency using, in addition to linear cointegration models, nonlinear cointegration and error-correction models (ECMs) which allow the efficiency intensity to change per regime. Our findings can be summarized as follows: i) futures prices are found to be cointegrated with spot prices, but they do not constitute unbiased predictors of future spot prices; ii) the hypothesis of risk neutrality is rejected; iii) the short-run efficiency hypothesis is rejected, suggesting that using past futures price returns improves the modeling and forecasting of future spot prices; and iv) the nonlinear modeling suggests the presence of two distinct regimes wherein the first regime the efficiency hypothesis is supported, whereas in the second it is rejected. The empirical findings have important implications for producers, hedgers, speculators and policymakers.

مقدمه انگلیسی

International financial markets have known a succession of serious crises since 1987 (e.g., the 1997–1998 Asian crisis, the 2001 dot com recession, the 2001 Argentina economic crisis and the 2007–2010 global financial crisis), which are commonly characterized by high volatility and contagion effects (Forbes and Rigobon, 2002, Lee et al., 2007 and Markwat et al., 2009). Recent studies also suggest lower diversification benefits from equity investments due to the increased correlations between equity markets around the world, particularly during times of high and extreme volatility (Chan-Lau et al., 2004 and Diamandis, 2009). These stylized facts have undeniably encouraged investors to consider alternative investment instruments as a hedge against increasing risk and uncertainty in equity markets. Energy products (mainly oil, oil-related and natural gas contracts) and precious metals (mainly gold, palladium, platinum and silver) have emerged as natural desirable asset classes for international portfolio diversification because of their different volatile returns and low correlations with stocks (Arouri and Nguyen, 2010, Conover et al., 2010, Daskalaki and Skiadopoulos, 2011 and Hammoudeh et al., 2013). The flight-to-quality phenomenon equally occurs when financial instability increases and deepens in the stock markets or when the price of oil exhibits long swings. Indeed, most investors, for fear of losses, allocate their investments to precious metals which are viewed as safe-haven and refuge assets during widespread market panics. On the other hand, the sharp increase in the level and volatility of commodity prices over the last decade, owing to increased commodity demand from emerging countries and growing financialization of commodity markets (derivative trading and financial investor activity), has given rise to considerable interest in the factors driving commodity prices (Domanski and Heath, 2007 and Dwyer et al., 2011). That is, commodity markets have also become somewhat more like financial markets. Choi and Hammoudeh (2010) also find that similar to those of the S&P 500 equity market index, the dynamics of five strategic commodities including crude oil and precious metals is governed by two volatility regimes. These commodity prices are also found to be affected by macroeconomic variables and subject to herding behavior. Likewise, Creti et al. (2013) examine the links between price returns for 25 commodities and the S&P 500 index over the period 2001–2011 and show that the conditional correlations between commodity and stock markets change over time and are highly volatile. These authors also note that the 2007–2008 financial crisis strengthens the links between these markets as well as underlines the financialization of commodity markets particularly as indicated by evidence of speculation for oil, coffee and cocoa markets. This has led to considerable interest in commodity markets as evidenced by the extent to which they have reflected the ‘fundamental’ determinants of demand and supply versus the growing financialization of these markets. All are more likely to be influenced by demand, supply and expectations about future business cycles. The observed increases in price speculations and the high degree of elastic substitution among energy products and between precious metal contracts in both consumption and production all call for a careful investigation of their price dynamics.
The energy and precious metal futures contracts allow hedgers to secure the prices of their expected purchase or sale of energy products and precious metals at a specified delivery date in the future. The prices of futures contracts thus convey information about expectations of market participants concerning the spot prices at the maturity date. Such information is crucial for agents not fully hedged as well as for agents planning for future production or use of precious metals and energy products. The importance of futures prices thus arises in particular with their ability to forecast spot prices at specified future dates as they provide economic agents with means of managing the risks related to the trading of energy products or precious metals in the spot markets. While all risk management tools share a common interest, i.e., minimizing the risk against an unfavorable evolution of future spot prices, their use is conditional on some market conditions among which informational efficiency is most important. Having its root in the well-known efficient market theory of financial economics, informational efficiency refers to the degree to which market prices reflect accurately and instantaneously all the relevant information about the true underlying value of financial securities. In this schema of things, the informational efficiency matters in two main ways. First, if a particular market is inefficient, investors may build up various trading strategies that lead to earn abnormal returns. Note however that these abnormal returns can only be made in the short-run when the opportunity arises, but should be arbitraged away in the long run when all investors do the same. Second, if all relevant information is incorporated in financial securities' prices as soon as they appear, new capital will go to the most productive investments. These features thus highlight the necessity of research on the efficiency of asset markets.
The efficient market hypothesis (EMH), formally developed by Fama, 1965 and Fama, 1970, has been tested for a variety of asset classes including commodities. As far as the energy and precious metal markets are concerned, this hypothesis implies that futures prices constitute the best unbiased forecasts of future spot prices plus or minus a time-varying risk premium, and thus speculators cannot earn abnormal profits. On the other hand, futures prices are unbiased forecasts of future spot prices if one or more speculators are risk-neutral. Therefore, the question of whether or not commodity prices behave according to the market efficiency hypothesis matters because efficiency enables one to know if speculative returns could be earned. To date, several empirical studies have addressed this issue for commodity markets (Aggarwal and Sundararaghavan, 1987, Alvarez-Ramirez et al., 2010, Arouri et al., 2010, Booth and Kaen, 1979, Ortiz-Cruz et al., 2012, Solt and Swanson, 1981 and Tabak and Cajueiro, 2007), but their focus is mainly on the stochastic properties of successive spot and/or futures price changes of gold, silver and crude oil.
Comparing to previous studies, this article tests the hypotheses of informational efficiency and risk neutrality for energy and precious metals markets over the short- and the long-run, using both linear and nonlinear techniques among which the exponential smooth transition error-correction model (ESTECM) is of particular interest. Indeed, a market may experience some inefficiency in the short-run but it remains globally efficient in the long-run. These different patterns of the price behavior have obviously important but also very different implications for market operators. Moreover, because of transaction costs, information asymmetry and investors' heterogeneous expectations, markets can be inefficient during a certain regime. As a result, the use of nonlinear models is of particular interest for capturing short-run changes in the efficiency intensity over different regimes. Under the efficient and risk neutrality hypotheses, the futures price will be an optimal forecast of the future spot price at the contract termination. Furthermore, the efficiency hypothesis also states that asset prices fully and instantaneously reflect all available information so that no traders can consistently earn abnormal profits by speculating in the futures prices. Our paper also contributes to the literature by testing this hypothesis. Thus, we propose an integrated approach to empirically test the market efficiency and risk-neutrality hypotheses in the presence of nonlinearity at both the short- and long-run levels for petroleum (WTI, gasoline, heating oil, and propane), natural gas and precious metals markets (gold, silver, palladium, and platinum). We particularly examine the dynamic relationships between the spot and futures prices of these markets, most of which have not been researched well in the market efficiency literature.
The remainder of this article is organized as follows. Section 2 briefly reviews the related literature. The empirical framework is introduced in Section 3. Section 4 describes the data used and reports the obtained results. Section 5 discusses and concludes the main implications of the empirical results.

نتیجه گیری انگلیسی

In this paper, we provide a comprehensive empirical investigation of the efficiency and risk neutrality hypotheses for nine energy and precious metal markets over the last decades. We apply a wide range of linear and nonlinear econometric techniques to test for both long-run and short-run efficiencies. Our main findings can be summarized as follows. Firstly, we show a significant cointegration relationship between the spot and futures prices of these commodities (i.e., they converge towards a common equilibrium in the long run), indicating that both these prices are governed by common factors and can respond to common expansionary and contractionary monetary and fiscal policies. Additionally, their contracts are not good substitutes in diversified portfolios, are not a good hedge for each other and can be a source of contagion for each other.
Secondly, the efficiency hypothesis is called into question in the short and long run whatever the assumptions on the risk premium are. These findings are consistent with the view that the futures prices do not constitute an unbiased predictor of the future spot prices. Therefore, investors can design investment strategies based on past information which can be used to improve the forecasting of future spot prices, creating opportunities for making abnormal profit. On the other hand, regulators should focus on policies that encourage arbitrageurs to arbitrage away the abnormal profit and increase the transparency and quality of information flows in both spot and futures markets.
Thirdly, we find some evidence of time-varying risk premia for silver and natural gas, which underscores the failure of the linear ECM to appropriately specify the relationship between spot and futures markets. Furthermore, since the risk premium is a major determinant of discount rates, which in turn are used to evaluate new investments in spot energy and precious metal markets would change over time, making the evaluations and pricing more challenging. Moreover, the literature stresses the counter-cyclicality of risk premium, whereby an increase in this premium raises the expected return on risky assets, contributes to a collapse of investment in stock markets and leads to a decline in economic activity such as industrial production.
Finally, accounting for nonlinearity in the modeling of the spot price adjustment dynamics and defining it through the alternation of different regimes have substantially improved the analysis. More precisely, we point out an on/off nonlinear time-varying relationship between the spot and futures prices. The analysis of the adjustment terms of the nonlinear model casts doubt on the validity of the market efficiency hypothesis when the disequilibrium size between spot and futures prices becomes very high. This pattern could occur during the times of excessive forwardation and backwardation, and implies that the magnitude of the spread between the spot and futures prices of a commodity can be used to predict the future spot price of that commodity. Market investors and policymakers thus have interest to adapt their actions according to the state of the market (i.e., efficiency vs. inefficiency). If the considered market is in its inefficient state, investors can for example use the information included in the futures contracts to forecast the price development in the spot segment, and market regulators may undertake measures that favor more arbitrage activities.
Summarizing all, our results show that participants in the spot commodity markets under consideration can still build profitable strategies based on past information contained in futures prices of those commodities. Since these markets are not efficient, there is a need for searching for optimal asset allocations and risk hedges of portfolios involving both spot and futures instruments of the underlying commodities under consideration.